The phenomenon known as an Industrial Depression comes round with a sickening rhythm, strikes nearly the whole world at the same time and shows the same symptoms in every country. It falls on countries whose governments are autocratic and on countries where universal suffrage prevails; where gold and silver are common currency and where paper passes for money; where there are large standing armies and where no regular forces are maintained.
The symptoms which accompany an industrial depression are, at first sight, perplexing and contradictory. On the one hand, large numbers of people are without the necessities of life while, on the other, warehouses are stocked with goods which cannot be sold and harvests are ploughed back into the earth. Business men everywhere find it difficult to obtain credit and complain that money is tight, and yet large funds are idle for want of investment. The discount rate rises and the interest rate falls.
Looking at one or other of these different symptoms, economists propound conflicting remedies. There are those who, alarmed at the stocks of goods which cannot be sold and the consequent collapse of prices, teach that the cause of depression is overproduction and that the remedy is to restrict production in order to restore prices. Others, concerned at the large number of unemployed and ascribing the depression to that cause, advocate public works schemes on a gigantic scale to absorb the idle men. Yet others say the depression is brought about because money is tight and advocate the creation of cheap credits and the issue of fresh money to set the wheels of industry in motion and increase production. In diametric opposition are those who view the collapse of credit as the result of overspending, of overconsumption. To them the remedy appears to be the strictest economy and they abhor cheap credits. Then in different countries, the depression is ascribed to extravagant government expenditure, to government parsimony, to the gold standard, to paper money, to the maintenance of large standing armies, to the absence of a standing army, to the school leaving age and even to sunspots (professor Jevons seriously ascribed trade depressions to disturbances on the sun). Such is the sweet harmony amongst our principal economists.
The politician, with his exquisite sense of compromise, carries through all the proposals. He sets up marketing boards, trade controls, tariffs and quotas to limit production and maintain prices. He launches public works schemes and pours out subsidies to increase employment. He issues cheap credits and enforces the strictest economy. Taxation is poured out in lavish works schemes and the social services are reduced to promote economy in government. One country goes off the gold standard while its neighbour goes onto it. Nearly every country suffers a change of government, those who enjoyed a reforming government change to a conservative form, those who were conservative become radical.
Now it must be quite clear that all these proposals cannot be right and that the measures taken are largely in conflict. The fact that depressions strike nearly every civilized country in the world would seem to show that the cause of them is common to all, however much they may vary in their traditions and institutions. The fact that the depressions occur at regular intervals would make it appear that the cause is always present. It is plain that they cannot happen by accident.
The forces which have been examined so far in this book are universal in their application and are always in operation whatever institutions a country may possess. It is not unreasonable to expect, therefore, that forces of this nature cause the trade cycle of boom and slump.
At the stage reached in this enquiry, however, all the facts which go to make an industrial depression cannot be usefully examined. This full examination must be postponed until the forces governing trade between men and nations have been ascertained. It is sufficient here to observe the behaviour of land, human desires and labour during these times. However, as these three are all the factors which go to make production, an examination of them must disclose fundamental facts about industrial depressions and it will be left to the later investigation to see how these fundamental facts work themselves out and how their effects are carried from industry to industry, from country to country. The immediate objective of this chapter is to test the conclusions reached concerning the distribution of wealth by the facts of the trade cycle.
Whatever else may be in doubt about an industrial depression, this much is clear, it is a cessation of production. Large numbers of men are thrown out of work and without labour there can be no production. Again this stoppage is not peculiar to a few industries but is general to all. This is really a remarkable condition - millions of men throughout the civilized world are reduced to poverty for lack of the very things which their labour could easily produce, yet, though they would gladly work, they cannot find employment. The problem is how does it come about that so many people, who amongst them do not lack skill, knowledge or intelligence, are beggared in this bountiful universe; what causes this stoppage which none desires but is dreaded by all?
Every depression is preceded by a boom, during which production is increasing and prices are rising. More land and labour are being employed and rent and wages are increasing. This condition constantly encourages the expansion of industry, but it also encourages speculation, the buying of land, of commodities, of stocks, shares and other titles to wealth yet to be produced, so that the purchasers may gain from the rising market.
It is to be observed that rising prices are not necessarily healthy. A producer may gain more money because prices have risen but, when he turns to purchase the things he wishes to have, the same high prices reduce the value of his money. Indeed, the constant tendency in progressive industries is for prices to fall but for production to expand. It is truly in the interest of producers generally that they should increase production and sell more, though the individual prices be reduced and, in turn, buy more with the proceeds of their industry. Trade is, in fact, the exchange of goods and services for goods and services. Unless a man's production carries him through to the enjoyment of the production of others, his work will have been wasted. The money which comes between the poles of exchange can be very deceptive unless this simple principle is kept in mind.
It is the volume of goods and services which are produced and exchanged that matters, not the prices at which the exchange is made. Obviously, where more is produced there is more to be enjoyed though the money used in trade drops in quantity and, conversely, if less is produced there is less to be enjoyed though the money used trebles in amount. Suppose, for example, that at the end of a week a man earns £10 which he expends for his benefit and that next week his earnings are increased to £15, but in order to buy the same goods and services as the week before he must pay £20, then, obviously, his earnings have fallen not increased. There has grown up of late, in those industries which enjoy monopoly positions and which are, for the main part, concerned in the production of primary products such as coal, oil, copper and aluminium, a practice of negotiating "wage increases" which are, in truth, wage reductions. Thus, in the coal industry, the employers will negotiate with the union an increase in money wages of one shilling per shift on condition that coal prices are increased by anything from one shilling and sixpence to two shillings per shift. This increase in coal prices passes itself into everything in the production of which coal is used and results in a general increase in prices with the result that the coalminers' wages have, in fact, been reduced.
The employees of a particular industry might gain a temporary advancement at the expense of workers in other industries by such negotiations, as the increased price would be borne by all and the increased wage enjoyed by a few but, as all the other major industries follow suit the advantage, if any, is soon extinguished. The only real increase in wages is one which enables the worker to obtain more goods and services in return for the product of his work. The same applies to rent. Obviously an increase can only be achieved by expanding production.
It must be admitted at once that with a given volume of trade, prices can fall below a remunerative level. Where production is expanding, a reduction in prices may ensue to everyone's benefit but where the turnover is limited or, worse still, falling, a fall in prices may be disastrous. In the early days of a slump many industries are unable to dispose of their products, that is to say their turnover has fallen, and the consequent drop in prices is disastrous. This fact, however, only reinforces what has been said before. The trouble with these industries is the failure in the volume of trade, the collapse of prices is only a result. The reaction of one industry to another, the relation between prices, rent and wages, and what determines a remunerative price, will all be examined in detail at a later stage of our enquiry. It is sufficient to observe here that trade is the exchange of goods for goods and that there will be more wealth for distribution between landowners and labourers when industry expands and less when it contracts, whatever may happen to prices in the process.
As has already been stated, an industrial boom is marked by expanding production, increasing prices and rising rent and wages. The expansion of production is what all men desire and is the cause of the rise in rent and wages. The speculation which accompanies the upward trend of prices is in a different category. As was seen in the last chapter, speculation in articles of wealth, however undesirable, can never reach serious proportions so long as industry can produce the wealth affected, for any inflation of the price will call forth fresh production. So it is in industrial booms, unless the expansion of production of the article concerned is checked, this very expansion will stop the rise in price and will probably bring it down. Speculation in land, however, not merely cannot be defeated in this way but actually effects the check in production which keeps prices rising.
Modern industry may be likened to a pyramid. At the base are those industries concerned directly with the extraction of wealth from the land such as mining, quarrying, agriculture, forestry, electricity works and the like. These industries supply the raw materials necessary for the factories which shape them according to the demands of the moment. Thus resting upon those basic industries are others which in turn become more and more remote from the first operation in the creation of wealth, until at the apex of the pyramid are those such as merchandising and banking, concerned solely with the machinery of exchange. Clearly unless the raw materials flow in sufficient quantity from the basic industries to supply the needs of all those which depend upon them, then a check must be felt throughout production. If miners and field workers are kept out of work by artificial restrictions on the production of wealth from the land, then at the other end of the industrial chain barristers will be briefless and accountants will lack clients.
Speculation in land is the withholding of land from use or from its full use in order to capture a big rent. As has been observed before, no price could be obtained unless the land was needed for use and the greater the need the greater the price. Thus speculation in land reduces itself to withholding land which is needed for use, in other words, it is the checking of industry. Where industry is rapidly expanding, as is the case when an industrial boom is under way, the demand for access to land rises correspondingly. Where land is all enclosed, the result must be that the price demanded for land will increase rapidly. In dealings in land, the consideration which both parties have uppermost in their minds is the future advantage to be had from controlling the land, that is the rent which is likely to accrue. Where industry is expanding, and the talk is that it will continue to do so, landlords will not be in a hurry to part with their land unless they are offered a price based not on the present rent of the land but on the rent which the land will yield, as it is hoped, in the future. This attitude has a double effect: first, it maintains a constant check on the expansion of industry and second, it causes industry to be founded on the assumption that prices earned by industry will continue to rise notwithstanding the increased production. In other words, by preventing industry from expanding as rapidly as it otherwise would, this operation allows the prices of wealth to increase above the natural level and also makes it necessary for this unnatural price level to be maintained if industry is to function profitably.
As has also been observed, another form of land speculation growing very popular in these days is that by which large industrial concerns, particularly those engaged in extracting wealth from the soil, buy up all the natural resources available for their industry, not to use them but to prevent others from using them. The object of this speculation is to enable the industrialist to gain a monopoly-hold on the market and so enable him to gain an artificially high price for his commodities. This price is to be obtained by checking the flow of goods on to the market. In a period of boom it means not allowing the industry to expand as fast as it otherwise would. The very substantial profits which are to be gained from this operation are witnessed by the tremendous expense and effort to which industrialists will go in order to gain this monopoly-hold. All this expense has to be recovered, with something extra into the bargain, and is most surely to be obtained by the purchase and closing down of natural resources.
These speculative operations in land strike at the basic industries first. Their effects are felt by the secondary industries in two ways - firstly, by the increasing toll of rent upon them and secondly, by the increasing prices of raw materials. Amongst those operators who are furthest removed from the basic industries the direct effect of rent claimed from them by a landlord is of small importance but the claim of rent upon them in inflated prices is a correspondingly serious matter. There are brokers who will say that if their rent were increased threefold it would be a matter of little importance but if the price of their raw materials increased by a penny the consequences would be serious. What they fail to see is that the operation of land speculation on the basic industries is to increase the price of their raw materials very considerably indeed.
So long as the boom continues to cause prices to rise this speculation may continue without appearing to cause any grave disorganization. By its operation, however, it causes prices to rise unnaturally high, a condition which can last only so long as production is strictly limited. The high prices, however, call forth more production based on the hope that they will continue to be high. The time must come when the price seeks its natural level. At once the inflated claim of rent shows itself. Those working directly on the land find that on the new price level they cannot continue to run their business successfully, unless they are in a monopoly position. This causes a drift from the land, from the fields and quarries - always the first sign of the impending depression. This failure at the source makes the condition more dangerous throughout industry. The growth of unemployment causes the market to shrink; those engaged in secondary trades are hit by the falling prices which render them unable to meet the heavy cost of raw materials; the contraction of the market for their goods increases their difficulty and prevents the price from rising; slowly they get into difficulties, not one or two here and there, but all of them except monopolists.
For a time the careful juggling of credit against debt maintains an outward show of prosperity. A business man depends upon his credit for success. If he were to publish to the world that his business was not doing well he would find his credit shrinking at the very time when he could least afford to lose it. Not unnaturally he puts a brave face on the position; so do they all. Finally, one big undertaking, usually more speculative than the rest, oversteps the mark and fails. This failure causes a general ruin, for all the creditors of the bankrupt concern find their credits reduced and are, consequently, no longer able to balance them against their debts. A host of failures follows, each one spreading wider the general havoc. Then panic spreads, well-secured creditors close down whole industries in order to get their money out quickly before it is too late. The debenture holders and the rating authorities in 1931 actually competed with each other to get their claims in first, desolating whole areas in the process. Goods are sold under the hammer - unemployment figures leap up, prices collapse, as they must, and yet more industries find that they cannot profitably sell their goods.
Trade is the exchange of goods and services for goods and services. Men's desires are unlimited and there cannot be too much production as a whole. No sooner is one desire gratified than another springs into its place and calls for yet more production. Obviously where men are hungry and ill-clad it is ridiculous to talk of over-production, yet goods may be produced which cannot be sold. For an industry to succeed it must not merely produce goods which people want, it must find people who have goods and services to give in exchange. Therefore, industry must be finely balanced. How this balance is to be maintained will be the subject of a later chapter. It is sufficient to notice here that if men are prevented from producing goods or rendering service then the balance must be upset. Where it appears that there are too many goods, yet it is evident that these goods would be readily consumed if people had the means to acquire them, then it must be that there are too few goods being produced to exchange with them. A check on production is under-production. Under-production in one industry if allowed to persist must show itself in apparent over-production in another, with a consequent fall of prices for that industry. Land speculation is a check on production and must show itself in seeming over-production. This false superfluity results in the failure of great industries and renders them in turn unable to purchase the raw materials which they normally use. Thus the cycle is completed. Their failure will make it appear that there is over-production of the raw materials produced directly from the land; whereas, in truth, it was under-production at this point that caused the dislocation. Ultimately, the failure of trade provides the astonishing spectacle of goods of every kind rotting for want of a market.
Thus in the end it would appear that too much has been produced of every article of wealth. It is this phenomenon which has given such currency to the popular error that the cause of trade failure is over-production. Clearly this cannot be so, for men cannot produce too much of everything. They may produce too much of something but not of everything. The truth is that the check on production caused by the withholding of land causes under-production not over-production, and this upsets the balance of trade and brings the whole fabric into ruin.
A moment's thought is sufficient to realize that an industrial depression is a failure of production. It is but an intensification of the very evils which are constantly present in society today. There is more unemployment, more business distress, more bankrupcies and more poverty. It is not a difference in kind but only a difference in degree. In short, the enclosing of land and the withholding of it, which is ever present in modern civilized society, had become more intense because of the boom and has resulted in a slump. Rent has risen to demand too much. It has not left enough to provide that minimum below which labour will not operate. This must result in a stoppage of industry.
In the trough of the slump men with funds seek security above everything. The lesson of the slump has frightened them from investing in industry. There is a general rush to buy government securities and land, for the taxpayer will go on paying even though at a reduced rate, and the land cannot be destroyed and is sure to be wanted in time. This rush to buy land, which always follows upon a depression, aggravates the cause of it, for it forces land prices up.
The curious spectacle which follows the failure of industry is that, while unemployment mounts and wages are consequently cut, while the interest rate drops to a new low level, the price of land soars. This hard fact makes it yet more difficult for industry to start again and is one of the principal reasons for the length of the trough of the depression.
The fact remains, however, that though land prices have risen, the annual income from the land has fallen. Wealth is not being produced so the rent cannot be paid. The proportion of wealth demanded in rent remains high, however - too high for industry to meet and sooner or later the claims of rent must give way. At the same time wages suffer a cut. All the trade unions and wage legislators are helpless before the ferocious struggle for work. Those industries which have survived the crash set out upon a vigorous policy of rationalization. This means simply obtaining more production per man and for every £ of capital employed. All these movements combine - the failure in rent causes the landlords demands to ease; the drop in wages and the rationalization of industry enable industry to pay more in rent. Then production begins to expand again. At once prices begin to recover and another boom is on its way. Ten years hence, unless war disturbs the process, the tragic story will be repeated.
These observations of the facts of an industrial depression bear out to the full the conclusions reached in the previous chapters. When, at a later stage in this book, the whole of the factors involved in the trade cycle are thoroughly discussed, it will be seen that the conclusions there reached only underline what has already been said.